Lazard Ltd, through its subsidiaries, is subject to U.S. federal income taxes on all of its U.S. operating income, as well as on the portion of non-U.S. income attributable to its U.S. subsidiaries. In addition, Lazard Ltd, through its subsidiaries, is subject to state and local taxes on its income apportioned to various state and local jurisdictions. Outside the U.S., Lazard Group operates principally through subsidiary corporations that are subject to local income taxes in foreign jurisdictions. Lazard Group is also subject to Unincorporated Business Tax (“UBT”) attributable to its operations apportioned to New York City.

On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act significantly revised the U.S. corporate income tax system by, among other changes, lowering the corporate income tax rate from 35% to 21%, implementing a partial territorial tax system and imposing a one-time repatriation tax on the deemed repatriated earnings of foreign subsidiaries. The Tax Act also included several provisions that limited the benefit of the tax rate reduction, such as restricting the deductibility of interest expense and other corporate business expenses. The Tax Act further included anti-base erosion provisions such as the base erosion and anti-abuse tax and tax on global intangible low-taxed income.

As a result of the reduction of the U.S. federal corporate tax rate to 21%, the Company was required to remeasure its deferred tax assets and liabilities at the new federal income tax rate of 21% based on the balances that existed on the date of the enactment of the Tax Act. The lower corporate tax rate resulted in a reduction of our net deferred tax assets by approximately $420,000 in the year ended December 31, 2017. See also Note 19 for the impact of the Tax Act on the tax receivable agreement obligation.

The Tax Act also required companies to pay a one-time repatriation tax on previously unremitted earnings of certain non-U.S. corporate subsidiaries. Most of the Company’s operations outside the U.S. are conducted in “pass-through” entities for U.S. income tax purposes, and, as a result, the deemed repatriation transition tax did not apply to these pass-through entities or their earnings. The Company instead provides for U.S. income taxes on a current basis for those earnings. The Company also conducts operations outside the U.S. through foreign corporate subsidiaries, and the Company recorded a provisional amount of deferred tax expense in the year ended December 31, 2017 related to the one-time repatriation tax on the foreign earnings of those corporate subsidiaries.

In accordance with the guidance provided by Staff Accounting Bulletin No. 118, the Company recognized the provisional tax impact related to the one-time deemed repatriation tax on certain foreign earnings and the remeasurement of our deferred tax assets in the year ended December 31, 2017. In 2018, we finalized our analysis of the provisional items, including the one-time repatriation tax, and adjustments to previously recorded provisional amounts related to the Tax Act were not material to the Company’s consolidated financial statements.

On January 1, 2017, the Company adopted new accounting guidance on share-based incentive compensation. As a result of the adoption of this new guidance, the Company recognized excess tax benefits of approximately $33,000 and $9,000 from the vesting of share-based incentive compensation in the provision for income taxes in the consolidated statements of operations for the years ended December 31, 2018 and 2017, respectively. The Company also recorded deferred tax assets of $81,544, net of a valuation allowance of $12,090, as of January 1, 2017, for previously unrecognized excess tax benefits (including tax benefits from dividends or dividend equivalents) on share-based incentive compensation, with an offsetting adjustment to retained earnings.

The components of the Company’s provision for income taxes for the years ended December 31, 2018, 2017 and 2016, and a reconciliation of the U.S. federal statutory income tax rate to the Company’s effective tax rates for such years, are shown below.

	Year Ended December 31,
	2018			2017			2016
Current:
Federal	$	2,507		$	349		$	1,766
Foreign		95,279			64,119			54,253
State and local		5,145			(32	)		4,090
Total current		102,931			64,436			60,109
Deferred:
Federal		49,604			480,085			50,602
Foreign		(12,632	)		12,928			1,354
State and local		8,414			8,150			11,704
Total deferred		45,386			501,163			63,660
Total	$	148,317		$	565,599		$	123,769

	Year Ended December 31,
	2018			2017			2016
U.S. federal statutory income tax rate		21.0	%		35.0	%		35.0	%
U.S. tax reform		1.0			43.4			-
Foreign source income not subject to U.S. income tax		(2.2	)		(4.2	)		(9.3	)
Change in U.S. federal valuation allowance		2.1			(3.4	)		(3.6	)
Share-based incentive compensation		(5.0	)		(4.0	)		-
Foreign taxes		5.7			1.8			0.5
Foreign tax credits		(4.3	)		(2.0	)		(0.6	)
State and local taxes		2.0			2.4			3.0
Income of non-controlling interests		(0.1	)		(0.3	)		(0.3	)
Other		1.6			(0.2	)		(0.8	)
Effective income tax rate		21.8	%		68.5	%		23.9	%

Deferred income taxes are provided for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated statements of financial condition. These temporary differences result in taxable or deductible amounts in future years. Details of the Company’s deferred tax assets and liabilities are as follows:

	December 31,
	2018			2017
Deferred Tax Assets:
Basis adjustments (a)	$	288,764		$	339,133
Compensation and benefits		159,799			175,456
Net operating loss and tax credit carryforwards		249,509			239,959
Depreciation and amortization		1,764			1,537
Other		35,801			34,615
Gross deferred tax assets		735,637			790,700
Valuation allowance		(73,114	)		(61,456	)
Deferred tax assets (net of valuation allowance)		662,523			729,244
Deferred Tax Liabilities:
Depreciation and amortization		14,550			17,257
Compensation and benefits		9,816			23,251
Goodwill		26,124			21,749
Other		19,828			26,134
Deferred tax liabilities		70,318			88,391
Net deferred tax assets	$	592,205		$	640,853

The historical profitability of each tax paying entity is an important factor in determining whether to record a valuation allowance and when to release any such allowance. Certain of our tax-paying entities have individually experienced losses on a cumulative three year basis or have tax attributes that may expire unused. In addition, one of our tax paying entities has recorded a valuation allowance on substantially all of its deferred tax assets due to the combined effect of operating losses in certain subsidiaries of that entity as well as foreign taxes that together substantially offset any U.S. tax liability. Taking into account all available information, we cannot determine that it is more likely than not that deferred tax assets held by these entities will be realized. Consequently, we have recorded valuation allowances on $73,114 and $61,456 of deferred tax assets held by these entities as of December 31, 2018 and 2017, respectively.

Changes in the deferred tax assets valuation allowance for the years ended December 31, 2018, 2017 and 2016 was as follows:

	Year Ended December 31,
	2018			2017			2016
Beginning Balance	$	61,456		$	69,593		$	89,251
Charged (credited) to provision for income taxes		14,156			(23,670	)		(15,981	)
Charged (credited) to other comprehensive income and other (a)		(2,498	)		15,533			(3,677	)
Ending Balance	$	73,114		$	61,456		$	69,593

(a)

In accordance with the accounting guidance described above, 2017 includes recognition of previously unrecognized excess tax benefits offset by a valuation allowance of $12,090 recorded to retained earnings. 2016 includes acquisition-related deferred tax assets offset by a valuation allowance in the amount of $2,271.

The Company had net operating loss and tax credit carryforwards for which related deferred tax assets of $249,509 were recorded at December 31, 2018 primarily relating to:

With few exceptions, the Company is no longer subject to income tax examination by foreign tax authorities and by U.S. federal, state and local tax authorities for years prior to 2014. While we are under examination in various tax jurisdictions with respect to certain open years, the Company does not expect that the result of any final determination related to these examinations will have a material impact on its financial statements. Developments with respect to such examinations are monitored on an ongoing basis and adjustments to tax liabilities are made as appropriate.

A reconciliation of the beginning to the ending amount of gross unrecognized tax benefits (excluding interest and penalties) for the years ended December 31, 2018, 2017 and 2016 is as follows:

	Year Ended December 31,
	2018			2017			2016
Balance, January 1 (excluding interest and penalties of $15,136, $15,392 and $13,083, respectively)	$	78,674		$	78,396		$	77,280
Increases in gross unrecognized tax benefits relating to tax positions taken during:
Prior years		653			1,598			5,891
Current year		17,961			19,823			18,438
Decreases in gross unrecognized tax benefits relating to:
Tax positions taken during prior years		(699	)		(2,961	)		(5,316	)
Settlements with tax authorities		(1,218	)		-			(1,706	)
Lapse of the applicable statute of limitations		(17,482	)		(18,182	)		(16,191	)
Balance, December 31 (excluding interest and penalties of $15,901, $15,136 and $15,392, respectively)	$	77,889		$	78,674		$	78,396

	Year Ended December 31,
	2018		2017			2016
Unrecognized tax benefits at the end of the year that, if recognized, would favorably affect the effective tax rate (includes interest and penalties of $15,901, $15,136 and $15,392, respectively)	$	78,693	$	78,841		$	81,564
Unrecognized tax benefits that, if recognized, would not affect the effective tax rate	$	15,097	$	14,969		$	12,224
Interest and penalties recognized in current income tax expense (after giving effect to the reversal of interest and penalties of $4,889, $6,185 and $3,143, respectively)	$	765	$	(256	)	$	2,309

The Company anticipates that it is reasonably possible that approximately $13,000 of unrecognized tax benefits, including interest and penalties recorded at December 31, 2018, may be recognized within 12 months as a result of the lapse of the statute of limitations in various tax jurisdictions.